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Energy Efficient Mortgages (EEMs)
General Information
Energy Efficient Mortgages are designed to work by qualifying more homebuyers who purchase energy efficient homes. The premise is that if a potential homebuyer will be paying less in energy bills because of the energy efficiency of the home, then they could qualify for a larger monthly mortgage payment. Energy Efficient Mortgage programs have been designed for both resale and new construction home purchases. Primarily the major mortgage organizations, FHA, VA, Fannie Mae, and Freddie Mac offer various types of EEMs. In addition to the major mortgage organizations EEMs, Energy Star Mortgages are a retail product offered by lenders participating in the Environmental Protection Agency’s (EPA) ENERGY STAR New Homes Program.
The initial premise of EEMs in qualifying more homebuyers is that if the home energy bill is reduced, then the potential homebuyers debt to income ratio is improved, thereby making them a more attractive candidate for a home mortgage. Another approach is that if the home is deemed to meet a certain level of energy efficiency, specifically meeting the Model Energy Code, then the potential homebuyer is entitled to a 2% “stretch” of the debt to income formula.
Issues
- FHA, VA, Fannie Mae and Freddie Mac all use different criteria to determine the energy savings as well as provide widely different financing levels and services;
- Lack of conformity in the formulas used to qualify potential buyers;
- Buyer and seller reticence to embark on a lending process that may create delays in the transaction; and
- Lack of easily accessible information about EEMs, appropriate energy efficiency measures, or estimated energy cost savings.
The EEM has not been particularly successful in California due largely to the high cost of housing compared to the rest of the nation. In addition, California already uses a much higher lending ratio for financing new home purchases than those endorsed by financing corporations promoting EEMs.
The California Building Industry Association and its members have been working cooperatively with the major lending organizations to develop a functional EEM program that allows homebuilders to increase the number of eligible homebuyers and create greater purchasing power for them.
Specific EEM Programs:
Please check with your mortgage professional for availability and applicability of the following programs and products.
FHA-insured Energy Efficient Mortgages allow the addition to the mortgage, without an appraisal of the improvements, the cost of cost-effective energy-efficient improvements that, in the case of a new home, exceed the requirement of the MEC (Model Energy Code). The extra amount that can be added to the mortgage is limited to $4,000 or 5% of the appraised value of the property prior to the installation of the energy-efficient improvements (up to $8,000), whichever is greater. These additional amounts are added to the mortgage, are not subject to down-payment requirements, and may exceed FHA loan limits.
Veterans Administration (VA) Energy Efficient Mortgages also allows no appraisal of the energy efficiency improvements (unless their cost exceeds $6,000) and the improvements may be 100% financed. Up to $3,000 may be financed based solely on documented costs. Up to $6,000 may be financed if the reduction in utility costs will exceed the increase in mortgage payments, and over $6,000 may be financed based on a VA value determination. Unlike the FHA EEM, the maximum mortgage amount guaranteed by VA may not be increased to cover the cost of energy efficiency improvements.
Fannie Mae offers the HomeStyle Energy Efficient Mortgage. This program is an underwriting adjustment that can be used in conjunction with a wide range of Fannie Mae products. As an underwriting adjustment, it allows the lender and borrower to select the mortgage product best suited to the borrower’s situation, and then use the EEM to further qualify the borrower for more mortgage funds. The underwriting adjustment allows the lender to subtract the monthly energy savings from the mortgage principle, interest, taxes and insurance (PITI) prior to calculating the monthly expense-to-income ratios and allows the lender to adjust the value (lesser of purchase price or appraised value) to include the energy savings prior to calculating the loan-to-value (LTV). The EEM can be used for 1-4 unit single-family owner-occupied principal residences, PUDs, and Fannie Mae-approved condominiums. The EEM can be used for both purchase and refinance transactions. For more information visit www.fanniemae.com and sort for EEMs for the most current information.
Freddie Mac: EEMs are not separate products, but are the result of underwriting flexibility that may be applied to all mortgage products by expanding the monthly housing expense-to-income ratio, the monthly debt payment-to-income ratio in qualifying the borrower. It may also increase the value of the property. Freddie Mac treats EEMs like any other mortgage product and they are available through any approved seller. In order to use the EEM overlay, a property must be considered an energy-efficient property. As energy-efficient property is broadly defined as a property that used cost-effective design, construction, materials, equipment, and site orientation to conserve energy. The specific items are not limited to a specific list but may range from caulking and weather stripping to solar systems. The energy-efficient items and their contributions to value must be included in the appraisal for the mortgage to receive special underwriting consideration. Included in the appraisal means the appraiser must list them and consider them in the property analysis. Freddie Mac currently offers the California Conventional Energy Mortgage Pilot Program. This program permits a 2% increase in the qualifying ratios and the energy improvements. For home purchases, the cost of the energy-efficient improvements may be added to the purchase price. For more information visit www.freddiemac.com and sore for EEMs for the most current information.
EPA Energy Star Mortgages and Loans. Energy Star Mortgages are a retail product offered by lenders participating in the EPA’s ENERGY STAR New Homes Program. By offering preferred terms, participating lenders may use the Energy Star logo to market their products. Several types of preferred terms are offered, including: 1) Free HERS ratings covered by the lender, 2) Higher qualifying ratios, 3) Assured appraised values, 4) Discounted interest rates, and 5) Reduced closing costs. Lenders that offer ENERGY STAR Mortgages tend to offer some combination of these preferred terms. ENERGY STAR Mortgages can only be offered to purchasers of ENERGY STAR Homes; therefore the lender requires documentation that the home is at least 30% more energy-efficient than the Model Energy Code. Currently, the Chase Manhattan Mortgage Corporation, Countrywide Home Loans, and a number of local banks in Indiana, Maryland and Florida offer ENERGY STAR mortgages. It should be noted that ENERGY STAR Mortgages traditionally do not stretch far enough to accommodate California lending requirements. For more information visit
Additional information on energy efficient mortgage opportunities is available at www.epa.gov/epahome/hi-energystar.htm search: loans.
Note: California builders can reference the attached memos from the U.S. Department of Housing and Urban Development and the California Energy Commission that meeting the California Title 24 Energy Standards qualifies as meeting/exceeding the requirements of the Model Energy Code (MEC) necessary to qualify for energy efficient mortgage products.
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